The new global financial regulatory policeman, Mark Carney, warned on Tuesday the world was "on the cusp of another retrenchment" in liquidity and urged careful management of European bank recapitalization.
In his first speech as head of the Financial Stability Board, the body responsible for implementing reforms to financial regulations, Carney, who also heads the Bank of Canada, urged European banks not to rely solely on asset sales to meet new international capital requirements.
The combination of bold moves by the European Central Bank and four trillion euros in unencumbered collateral at European banks should ensure that there is no European equivalent of a Lehman Brothers collapse, he said.
But the withdrawal of global liquidity as European banks deleverage needs to be well managed in order to limit the effects on the economy, said Carney. He predicted "at least" a brief recession in the euro area.
"As global liquidity recedes, volatility is increasing and activity falling. The effect on the real economy will soon be felt," he said in the prepared text of a speech he was delivering in London. more